Zions Not Only Bank to Be Hit by Volcker CDO Impact

Zions Bancorp. has the distinction of being one of the first banks to report a financial hit from the Volcker rule, announcing a $387 million charge Monday due to the regulation’s treatment of debt securities.

Other banks, including large institutions like Citigroup Inc. and regional banks such as BBVA Compass Bancshares Inc., may face similar issues due to their investments in so-called trust-preferred securities, or Trups.

Many big banks have had to restructure trading desks and shed others in anticipation of the rule, which was passed by regulators last week in an effort to reduce risks at banks.

The rule also is forcing some less expected sales. Under the rule, Zions says it will have to divest its portfolio of trust-preferred collateralized debt obligations. The Salt Lake City bank said it would move the securities from “held to maturity” to “available for sale,” which will force it to mark those holdings down to fair value.

Few banks are likely to have to take write downs in the same manner as Zions because most already classify their Trup CDOs as available for sale, said David Darst, an analyst with Guggenheim Securities.

Data from research firm SNL Financial show a relatively small smattering of banks have Trup CDOs classified as held to maturity. They include Citigroup, which had $218 million of Trup CDOs classified as such in the third quarter, and BBVA Compass, which had $80.2 million in that bucket.

A spokeswoman for Citi declined to comment and a spokesman for BBVA Compass did not immediately respond to inquiries. According to SNL’s data, Citigroup’s Trup CDOs represent a tiny portion of the bank’s $1.89 trillion in overall assets.
The Volcker rule, finalized last week by regulators, may ultimately force banks that invested in Trup CDOs to divest their holdings, which could cause a mad scramble among institutions.

Zions, like other U.S banks, loaded up on Trups in the years leading up the financial crisis. Many institutions issued the securities through CDOs, which were commonly acquired by other banks who thought they represented a good investment because of steady interest payments they stood to receive.

The banks that bought the Trup CDOs saw the value of the instruments decline during the financial crisis and meltdown in the U.S. mortgage market. “Banks felt like the credits underlying … these pools were similar to their own, so it would take a significant financial crisis … to drive losses in the pools,” Mr. Darst said.

Other banks that had large amounts of Trup CDOs in the third quarter include Wells Fargo & Co., with $595 million classified as available for sale, and M&T Bank Corp., which had $56.5 million available for sale, according to SNL.
The list of more than 200 banks contains numerous small community banks, which were among the biggest investors in Trup CDOs.